There was an old rule in Australian investment markets — never buy anything from Kerry Packer. If the Pacific Brands experience is any guide, you can add private equity to that list.

John Durie reported in The Australian this morning that Pacific Brands is expected to cut their dividend payment as the company struggles with a debt load of $740 million (of which $550 million needs to be refinanced before February 2010). Pacific Brands’ entire market capitalisation is now $294 million, having been floated by private equity firm CVC in 2004 for $1.25 billion.

Durie noted that Pac Brands is perilously close to breaching debt covenants, which require the company to maintain EBITDA which is greater than 3.5 times net debt. Therefore, if EBITDA falls below $211 million, the covenants will be triggered. Last year, the company’s EBITDA was $253 million, leaving little margin for error. Pacific Brands’ earnings are expected to drop substantially as a result of the lower Australian Dollar (Pac Brands purchases most of its products from overseas).

Pacific Brands’ recent performance casts serious doubt on the efficacy of the company’s board, especially in light of significant payments made to former CEO, Paul Moore. Moore was part of the private equity buy-out team which acquired Pacific Brands in 2001 from Pacific Dunlop. When the company was floated three years later, Moore received approximately $15 million for his stake (and retained a small shareholding in the public company).

Upon his retirement last year, the Pacific Brands board decided to lavish more shareholder funds on Moore. Moore worked only six months last year (retiring as CEO on 31 December 2008), however, the Pacific Brands board (led by the well-respected Pat Handley who resigned last week) paid Moore a fixed salary of $1.56 million. The previous year, Moore received a fixed salary of $1.19 million for the full 12 months. Therefore, Moore’s fixed salary effectively increased by 162% last year. No explanation was provided by Pacific Brands for the rise.

In addition, Pacific Brands also decided to pay Moore “retirement benefits” of $3.448 million last financial year, despite having no obligation to make any such payment (Moore retired, he was not terminated by the company. Further, Moore is already a rich man after the private equity sale). In total last year, Moore received $5.8 million. During the year ending 30 June 2008, Pacific Brands’ profit rose slightly from $106 million to $117 million, but it has since been acknowledged that the profit rise would largely have been courtesy of a rising Australian Dollar, rather than any managerial brilliance. In fact, the rapid fall in the Australian dollar is now threatening the company’s very existence.

Since floating for $2.50 per share in 2004, Pac Brands have paid out 67 cents in dividends. Therefore, in the space of four years, the company has managed to lose 50% of shareholders’ capital. The Pacific Brands case is yet another example of a board falling in love with its long-time CEO and happily lavishing millions of dollars of other people’s money, despite the executive actually destroying shareholder wealth.

While our politicians purport to deride executive payouts, like that received by Moore, last week, the Liberal and Labor parties both voted against a Greens proposition which was seeking to restrict executive termination payments (like the payment made to Moore) to $1 million dollars.